The much-awaited revisions to interest rates for small savings schemes have arrived, bringing changes for the January-March 2024 quarter. Whether you’re planning for your child’s future, securing your retirement nest egg, or simply seeking a safe haven for your hard-earned rupees, this update impacts your financial decisions.

In my previous article, I explained the rate hike that took place on September 29, 2023. The Government had increased interest rates on Small Savings Scheme Schemes by 20 basis points for the October-December Q3 FY 2023-24.

[Read: Small Savings Schemes: Revision of Interest Rates for the October-December Quarter]

Small savings schemes remain the backbone of financial security for millions of Indians. They offer stable fixed returns for the given period, they are backed by the government, and tax benefits, which makes them a popular choice for risk-averse individuals and long-term investors.

However, their appeal hinges on the interest rates offered, which are revised quarterly by the government.

Small Savings Scheme interest rates, while set by the government, are linked to market yields on government securities at a spread of 0-100 basis points over the yield of these securities of comparable maturities.

According to the Government’s methodology, when market yields on government securities rise or fall during the reference period, interest rates on Small Savings Schemes should move in the same direction. The Government reviews the interest rates on Small Savings Schemes every quarter considering the nation’s inflation and liquidity conditions.

Hike in Interest Rates on Small Savings Schemes for January – March Q4 FY 2023-24:

On December 29, 2023, the Ministry of Finance announced revised interest rates by 10-20 basis points for the January-March 2024 last quarter of the current fiscal year. This is the sixth consecutive quarter that rates on these instruments have increased.

The finance ministry made this announcement via a circular issued on December 29, 2023. In this article, we will navigate the revised rates for Small Savings Schemes, analyse their impact on different schemes, and offer informed insights for your savings journey.

For the Q4 of the financial year 2023-24, starting from January 01, 2024, the Government of India has revised the interest rates from the previous quarter on a few Small Savings Schemes and retained the existing rates on majority schemes.

Here’s the list of revisions on rates of interest of various Small Savings Schemes for Q4 FY2023-24 starting from January 01, 2023, and ending on March 31, 2023:

Small Savings Scheme Instrument Rate of Interest from July – Sept
Q2 FY 2023-24
Rate of Interest from Oct – Dec
Q3 FY 2023-24
Rate of Interest from Jan – March
Q4 FY 2023-24
Savings Deposit 4.0% 4.0% 4.0%
Post Office 5-year Recurring Deposit 6.5% 6.7% 6.7%
Post Office Monthly Income Scheme 7.4% 7.4% 7.4%
Post Office Time Deposit (1 year) 6.9% 6.9% 6.9%
Post Office Time Deposit (2 years) 7.0% 7.0% 7.0%
Post Office Time Deposit (3 years) 7.0% 7.0% 7.1%
Post Office Time Deposit (5 years) 7.5% 7.5% 7.5%
Senior Citizens' Saving Scheme (SCSS) 8.2% 8.2% 8.2%
Sukanya Samriddhi Yojana (SSY) 8.0% 8.0% 8.2%
National Savings Certificate 7.7% 7.7% 7.7%
Public Provident Fund (PPF) 7.1% 7.1% 7.1%
Kisan Vikas Patra (KVP) 7.5% (115 months) 7.5% (115 months) 7.5% (115 months)

(Source: DEA, Govt of India

The government opted for a targeted approach, increasing interest rates for two schemes – Sukanya Samriddhi Yojana (SSY) and 3-year Post Office Term Deposits (TDs). The SSY rate now stands at 8.2% (up from 8.0%) raised by 20 bps, while the 3-year TD yields 7.1% (up from 7.0%) raised by 10 bps.

  • Sukanya Samriddhi Account: This girl-child-centric scheme boasts the highest revised rate (8.2%) amongst small savings, making it even more attractive for parents and guardians. With compounding interest, it can significantly grow the corpus over the 21-year tenure, benefiting the girl’s future education and marriage expenses.
  • 3-year Post Office Term Deposits: The slight increase in interest (7.1%) offers a marginally better return for short-term investments. Individuals seeking fixed returns over a pre-defined period could find this scheme appealing, especially those looking for stability before reinvesting in market-linked instruments.

All other popular schemes, including Public Provident Fund (PPF), Kisan Vikas Patra (KVP), National Savings Certificates (NSC), and Senior Citizen Savings Scheme (SCSS), retained their existing interest rates for the January-March 2024 quarter. This consistency may reflect a continued focus on fiscal stability and inflation control.

The centre has not changed the interest rate on the extremely popular Public Provident Fund since the April-June 2020 quarter when it was reduced to 7.1% from 7.9%

With this revision, the interest rates on these Small Savings Schemes now range from 4% to 8.2%, which is the highest offered on Sukanya Samriddhi Yojana and Senior Citizens Savings Scheme (SCSS).

Government bond yields across the globe experienced significant fluctuations in October-December 2023, reflecting a complex interplay of economic factors and central bank policies.

The Indian government bond yields from October to December 2023 followed a significant upward movement, reflecting a complex interplay of internal and external factors. The 10-year yield increased by around 55 bps over the three months.

Considering the general upward trend in bond yields, it’s likely that the yield on the government’s 364-day Treasury bill also followed a similar trajectory. However, without the specific data from the RBI auctions, it’s difficult to say for certain.

This rise was primarily driven by global economic uncertainties, domestic inflation pressures, and increased government borrowing. However, there were also some temporary downward pressures from falling oil prices and easing US rate hike expectations.

As a result, the rise in the interest rate on the Post Office’s 3-year Recurring Deposit broadly mirrors the movement of the market for government securities. Given that returns on government assets increased everywhere, it is puzzling why interest rates on other small savings plans have not changed.

Should one consider investing in Small Savings Schemes?

Whether or not you should consider investing in Small Savings Schemes (SSS) in 2024 depends on your individual financial goals, risk tolerance, and overall investment portfolio.

Since May 2022, the Reserve Bank of India (RBI) has started raising the key policy rates. As a result, banks began raising interest rates on Fixed Deposits (FD), which has been good news for FD investors who were receiving decadal-low interest rates.

Small Savings Schemes face intense competition from Fixed Deposit Schemes, which are likewise thought of as low-risk investments due to their large increase in interest rates.

[Read: Debt Mutual Funds are Now at Par with Fixed Deposits for Taxation]

Fixed deposits are almost now at par with Small Savings Schemes, but when we consider the sovereign backing on the schemes, attractive tax benefits, as well as focus on low risk and stable returns, investment in Small Savings Schemes at favourable rates could be a better option for investors.

Given that, since the October-December quarter in 2022, the finance ministry began hiking interest rates on the Small Savings Scheme, after keeping them unchanged for nine consecutive quarters. For investors like retirees and senior citizens, with the requirement for regular monthly fixed-income Small Savings Schemes could be a better alternative to FDs.

Investors should take these interest rate revisions for Small Savings Schemes seriously since they won’t be sustainable for long. Some of these Small Savings Schemes also offer tax advantages that may assist investors in reducing their taxable income.

To Summarise…

While Small Savings Schemes interest rates are important, they are not the only factor to consider. Look for additional benefits like Liquidity – Some schemes, like Post Office Savings Accounts (POSA), offer easy access to funds. Flexibility – PPF allows partial withdrawals after completion of five years, providing some leeway. Security – All small savings schemes carry the sovereign guarantee of the Government of India.

It is important to take inflation into account as it could reduce the purchasing power of your fixed-income investments and savings. Investors may consider some exposure to equities via mutual funds, combined with investments in Small Savings Schemes since equities usually outperform inflation over long periods of time. This allocation could withstand the potential risk of rising inflation.

[Read: Navigating the Market Landscape: How to Approach Equity Mutual Funds in 2024?]

Remember, diversification is key. Don’t rely solely on small savings schemes. Explore worthy investment options to create a balanced portfolio aligned with your risk appetite and financial goals.

This article first appeared on PersonalFN here


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